Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 4 - Regulation impact statement
4.1 Since 1986 -87, Australia has operated a system of self assessment of income tax. Under self assessment, taxpayers' returns are generally accepted at face value in the first instance and the Australian Taxation Office (ATO) may verify the accuracy of the return and, if necessary, amend an assessment within a prescribed period. From 1989 -90, the returns of companies and superannuation funds became subject to a system of full self assessment under which the taxpayer calculates their liability and pays their tax when lodging their return.
4.2 Before self assessment, taxpayers provided the ATO with relevant information and the ATO applied the law to assess their liabilities accordingly. Where taxpayers provided all relevant information, errors of fact could be corrected by the ATO but mistakes of law could not be. Under that system, the majority of risk and the cost of mistakes of law by the ATO were borne by all taxpayers. Self assessment relieved the ATO of the obligation to examine returns lodged by taxpayers and allowed the ATO to amend errors of calculation, mistakes of fact and mistakes of law after processing the initial assessment and collecting the tax payable or paying a refund. In some circumstances, returns may be re-opened many years after the original assessment. In this way, the introduction of self assessment shifted the balance of risk and uncertainty towards taxpayers. The change to self assessment meant that the ATO's resources could be used more efficiently, allowing more revenue to be collected for the same administrative cost.
4.3 Under self assessment, taxpayers may be uncertain about how the law applies to their circumstances. Uncertainty exposes taxpayers to costs (such as a requirement to pay additional tax, penalties and interest, or the costs of professional advice and litigation) if a shortfall is detected by the ATO. Uncertainty may have implications for taxpayer perceptions about the fairness of the tax system and consequently may affect the level of voluntary compliance by taxpayers. Finally, uncertainty about the tax consequences of a proposed transaction may have adverse economic implications, as taxpayers may be unwilling to enter into economically beneficial transactions if they are not able to obtain assurance about their taxation consequences.
4.4 In a Press Release on 24 November 2003 (No. 098), the Treasurer commissioned a review of aspects of the income tax self assessment system (the Review) to examine whether the right balance had been struck between protecting the rights of individual taxpayers and protecting the revenue for the benefit of the whole Australian community.
4.5 On 16 December 2004, the Treasurer announced the Government's response to the Report of Aspects of Income Tax Self Assessment (the Report) and released the Report to the public in Press Release No. 106. The Treasurer announced that the Government would adopt the 30 legislative recommendations made in the Report, and that the Commissioner of Taxation (Commissioner) had advised the Treasurer that the ATO would implement the relevant administrative recommendations as soon as practicable.
4.6 The broad policy objective is to reduce the level of uncertainty for taxpayers and the risks and costs associated with self assessment, while preserving the capacity of the ATO to collect legitimate tax liabilities.
4.7 The Review examined many aspects of the income tax assessment system and recommended:
- improving certainty through providing for a better framework for the provision of ATO advice and introducing ways to make that advice more accessible and timely, and binding in a wider range of cases;
- improving certainty by reducing the periods allowed for the ATO to increase a taxpayer's liability in a wide range of situations;
- mitigating the interest and penalty consequences of taxpayer errors arising from uncertainties in the self assessment system; and
- providing for future improvements through better policy processes, law design and administrative approaches.
4.8 An analysis of each aspect will not be addressed within this regulation impact report due to some of the measures, namely penalty and interest change, being dealt with in an earlier analysis.
General impact group identification
4.9 The measures will have an impact on all taxpayer groups (individual self -preparers, individuals who use tax agents, very small businesses, superannuation funds, trusts, partnerships, small and medium businesses and large businesses) and their advisers.
4.10 The proposals will also have an impact on the ATO as administrator of the tax law.
4.11 The total administrative cost of the following 2 measures is estimated to be $58.8 million over 4 years. The cost to revenue of these proposals is estimated to be $28 million over 4 years. Although these costs are considerable, the package will significantly benefit taxpayers.
4.12 The objective is to ensure that the time during which taxpayers experience uncertainty about whether they have correctly self assessed their income tax liability more accurately reflects their risk profile and the revenue consequence of an error in their assessment.
Specific implementation options
4.13 Many individuals who are not in business and some very small businesses have straightforward tax affairs. While the law currently allows 4 years from the date of the original assessment to amend assessments for these taxpayers, the ATO generally completes its compliance activity for the vast majority within 2 years.
4.14 Subject to certain exceptions, the amendment period for increasing the liability of individuals and very small businesses is reduced from the present 4 years to 2 years. The 2 -year amendment period will exclude:
- a taxpayer that carries on a business, or is a partner in a business, that is not in the STS;
- a taxpayer that is a beneficiary of a trust estate at any time in that income year, unless the trust is an STS taxpayer or a full self assessment taxpayer (eg, a corporate unit trust, public trading trust or superannuation fund);
- a taxpayer if, in that year, that taxpayer or another entity entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of the taxpayer obtaining a scheme benefit in relation to income tax from the scheme for that year; and
- other high risk or special cases prescribed by regulation.
4.15 Taxpayers with complex affairs, including businesses that are not in the simplified tax system (STS), will have a 4-year amendment period.
4.16 Fraud and evasion cases will continue to have an unlimited amendment period, as people who engage in calculated behaviour to evade tax should remain permanently at risk.
4.17 The proposed measure will also:
- shorten the amendment period for the anti-avoidance provisions from 6 years to 4 years;
- make the period during which the ATO can amend nil liability and loss cases equivalent to the period for amendments creating liabilities; and
4.18 Amendments to the existing law will apply to assessments for 2004-05 and later income years. Special transitional rules will apply in relation to nil liability returns for the 2003-04 income year and earlier income years.
Impact group identification and analysis
4.19 All taxpayers will potentially be affected by the changes.
4.20 The proposed measure will change the periods during which assessments can be amended, providing additional certainty for taxpayers whose assessments are amended to create a liability (270,000 taxpayers in 2003 -04).
4.21 The time that elapses before an assessment can no longer be amended represents a major aspect of uncertainty for taxpayers. To the extent that this time can be reduced or made clearly known, the 'costs' of uncertainty will be reduced. Formalising a shorter period will increase certainty for a very large number of taxpayers at little cost. More specifically:
- the period for the ATO to increase the liability of individuals and very small businesses would be reduced from 4 years to 2 years. All eligible individual non -business taxpayers (8 million) and STS taxpayers (425,000 small businesses) whose assessments are amended will potentially benefit from this measure.
- the present 6-year amendment period for the Commissioner to give effect to the anti -avoidance provisions is abolished, so that a 4-year amendment period applies for taxpayers who seek a scheme benefit in relation to income tax.
4.22 Although a shorter period of review is proposed, this will not alter the record-keeping obligations for taxpayers. Therefore, the compliance costs are likely to remain unaffected.
4.23 These proposals are estimated to have a revenue cost of $28 million over 4 years.
4.24 The administrative costs of this proposal are estimated to be $35.8 million over 4 years, comprising $33.9 million over 4 years for the ATO and $1.9 million over 4 years for the Treasury.
4.25 Approximately $21.6 million will be required to improve the ATO's data collection process and the additional workload to maintain reliability. $12.3 million has been allocated to implement changes to the business system in order to capture and report losses.
4.26 The objective of reviewing the law is to improve the arrangements for a taxpayer to find out the Commissioner's view about how the taxation laws apply, so that the risks of uncertainty when they are self assessing are reduced.
Specific implementation options
4.27 The ATO provides taxpayers and tax practitioners with a range of advice on how to apply the income tax law, through formal rulings and other products. Currently, different types of ATO advice confer varying degrees of protection for taxpayers.
4.28 To address uncertainty, the Review proposed that all ATO advice provide a level of protection for taxpayers who have acted in good faith and have reasonably relied on advice that is later determined to be incorrect.
4.29 In the case of advice that is legally binding, taxpayers will be protected from amended assessments raising further primary tax, penalties and interest charges. In the case of any other written advice (unless that advice is clearly labelled non-binding) and oral advice provided by formal enquiry centres, taxpayers will be protected from penalty and interest charges. Taxpayers will receive similar protection where they act in accordance with long standing general administrative practice.
4.30 The categories of legally binding advice will be expanded to cover matters of administration, procedure and collection, and the Commissioner will be permitted to declare that other products for use by individual non -business self -preparers will provide the same protection as legally binding rulings.
4.31 Further amendments to existing law allow an individual non business taxpayer to apply for an oral ruling on how the tax law applies to them. Currently, a limited class of taxpayer may apply for an oral ruling on how the income tax law applies to them.
4.32 This measure replaces the existing provisions on rulings entirely. It makes certain categories of ATO advice (called rulings) legally binding on the Commissioner where taxpayers rely on rulings that apply to them. The categories of rulings are:
- public rulings;
- private rulings; and
- oral rulings.
4.33 This measure expands the category of matters that a public ruling may deal with to cover matters of administration, procedure, collection and ultimate conclusions of fact. Thus the Commissioner may declare that advice provided for the general information of non-business self-preparers be binding.
4.34 Under the proposal, a range of changes will be made. These include:
- expanding the category of matters on which private rulings can be provided;
- providing an avenue for review where an application for a private ruling has not been determined within 60 days;
- allowing the Commissioner to make reasonable assumptions in dealing with a private ruling request;
- allowing the Commissioner to consider information other than that supplied by the applicant in making a private ruling, provided the applicant is informed;
- clarifying the rules where rulings are inconsistent; and
- allowing the Commissioner to take account of additional information supplied after making the private ruling application.
4.35 This measure will extend the availability of oral rulings to all non -business issues raised by self-preparing individual taxpayers unless the issues are so complex that they would better be dealt with in writing.
Impact group identification and analysis
4.36 All taxpayers and their advisers would potentially be affected by the changes to the framework for ATO advice.
4.37 Overall, these amendments to the existing provisions will improve:
- the flexibility in communication methods between taxpayers and the ATO;
- timeliness of the provision of rulings; and
- certainty by making it clear that any written interpretive document the Commissioner publishes may be declared to be a public ruling.
4.38 This measure will have a positive effect on the responsiveness and reliability of ATO advice. Taxpayers should gain confidence that they are assessing their tax liabilities in line with the ATO's interpretation.
4.39 The administrative costs of these proposals, comprising additional funds for the ATO to improve quality and timeliness, are estimated to be $23 million over 4 years.
4.40 In particular, $8 million will be allocated to improving the timeliness of private rulings. Approximately $11 million has been allocated to improving the oral ruling system, including introducing a voice recording system.
4.41 There are not expected to be ongoing capital costs associated with this measure. Ongoing costs will only comprise operational and maintenance costs.
4.42 The revenue cost for the proposals is unquantifiable, but is unlikely to have a discernible impact against the forward estimates.
4.43 Taxpayers are not expected to incur additional compliance costs as a result of the proposed changes, except in circumstances where they apply for private rulings involving a valuation issue.
4.44 Where the taxpayer asks the Commissioner for a valuation, or provides the Commissioner with a valuation for review, the Commissioner may charge the applicant. However, this charge may simply replace the previous cost to the taxpayer of obtaining his or her own valuation.
4.45 Charges levied by the Commissioner with respect to valuations will be tax deductible for the taxpayer.
4.46 A cost recovery impact statement is currently being drafted by the ATO to evaluate the impact of the Commissioner charging for private rulings involving a valuation.
4.47 The Review invited public submissions and there has been extensive consultation with tax practitioners, business groups and agencies with a governance role in the tax system (namely the Australian National Audit Office, the Commonwealth Ombudsman, Inspector General of Taxation, ATO and the Office of Small Business).
4.48 Consultation for the Review included:
- The Review's discussion paper (released on 29 March 2004) outlined details for making a submission to the Review. The Review received over 30 comprehensive and detailed submissions from individuals, professional associations, companies and representatives of taxpayers.
- A website containing information on the Review including details for contacting the Review, as well as an electronic registration form to receive a copy of the Review's discussion paper on its release.
- The Review held consultative meetings with professional representatives around Australia.
- All formal public submissions received were published on the Treasury website, when the Report was released on 16 December 2004.
- Public consultation on the legislative provisions for these measures was conducted from February 2005 with industry groups and tax practitioners.
4.49 Submissions received by the Review indicated some criticism of existing legislation and identified some inadequacies in administering the law. These comments are summarised in the Report.
4.50 In addition, comments received about the draft legislation indicate the changes to existing law have broad support from industry groups, tax professionals and Government.
4.51 It is expected that the range of measures will facilitate greater confidence and a certainty within the system. The amendments to the existing law replace the existing provisions on review periods and ATO advice entirely. While the measure should considerably improve certainty, it will not affect the capacity of the ATO to collect legitimate income tax liabilities.
4.52 The Treasury and the ATO will monitor the implementation of these measures, as part of the whole taxation system, on an ongoing basis.